Huge Topics

The CEO’s Huge Topics seek to highlight those matters which the executive management team believes could have a significant impact on Huge’s ability to create value and deliver the Growing Huge Strategy and which the executive management team believes are most important to shareholders and prospective investors. One or more of the Huge Topics may have been raised by the non-executive directors on the Board, the Company’s shareholders, and its other stakeholders during various engagements over the course of FY2020. The executive management team also believes that by highlighting the Huge Topics it will strengthen the relationship that the executive management team has with the Board, the Company’s shareholders and its other stakeholders.

Huge will only achieve long-term success if it has invested in the right people and enough of the right people.

In October 2009, Huge’s market capitalisation, measured by the number of shares in issue and the market price at which those shares traded on the JSE’s stock exchange, was R35 million, and for the year ended 28 February 2010 it generated operating profit of R3 million. In October 2018, Huge’s market capitalisation had grown to R1.7 billion – 50 times greater than what it was nine years earlier – and for the year ended 28 February 2019 it generated normalised operating profit of R108 million. For FY2020, Huge generated operating profit of R134 million – 45 times greater than what it was 10 years ago. These successes were only achieved because of Huge’s people, their credibility, and the skills and experience they could bring to the table.

In early 2017, Huge was a single operating company, listed company and within the space of three months it became a multiple operating company, listed company. This was accomplished in a measured, conservative and risk conscious manner and at the lowest possible cost to Huge’s shareholders. However, if Huge is to grow, and if the Growing Huge Strategy is to be fulfilled, Huge must create human capital capacity.

In the last 18 months, Huge has established a corporate office to support its operating companies in pursuing the Growing Huge Strategy. Huge’s executive management team responsible for overseeing the delivery of the Growing Huge Strategy now comprises a Chief Executive Officer, a Chief Operating Officer, and a Chief Financial Officer. This executive management team is supported by a Company Secretary and three professional support staff. The creation of the role of Chief Operating Officer during FY2020, to which Andy Openshaw was appointed, created a key link between the Chief Executive Officer and the managing directors of the operating companies.

Huge’s view is that if it invests in companies with the ‘right jockeys’ it will have a direct and positive bearing on Huge’s long-term success and the success of the Growing Huge Strategy.

For Huge to be successful it must attract and retain its people. If Huge is to attract and retain human capital, it will have to create and offer incentives to its executives, members of management and employees.

During FY2020, shareholders overwhelmingly approved the Executive Option Agreements concluded with the Chief Executive Officer, the Chief Operating Officer, and the Chief Financial Officer. This support demonstrated that Huge’s shareholders understand the correlation between incentives and shareholder value.

The Executive Option Agreements create a mechanism which will only reward the executive management team if the Group grows its earnings and cashflows and if the market rewards this growth in higher valuations. These simple performance hurdles align the objectives of the executive management team with the objectives of the Company’s shareholders.

Huge has a very substantial real estate of customers, which includes three of South Africa’s leading financial institutions, but its real estate of SME customers with a low concentration of spend is the attribute that best informs its investment case.

The primary objective of the Growing Huge Strategy is growing Huge’s real estate of customers and in particular its real estate of corporate customers, whether or not they are small-office-home-office customers, SMEs or medium to large corporate organisations.

The value of Huge’s real estate of customers is often underestimated – Huge has a real estate of customers similar in size to some of the larger financial institutions in South Africa and because of the frequency and intensity of its engagement with these customers it can be argued that it is better placed to leverage this value.

Huge’s engagement with its customers is not fleeting or once-off – it is a daily engagement informed by the services that the Huge operating companies provide to these customers. These services, which happen to be connectivity services, ensure that Huge is always connected or engaging with these customers because Huge is providing the very connectivity that keeps these customers connected to the world. The frequency and intensity of these connections or engagements is the steel which reinforces the foundation of Huge’s investment case.

In many cases, the two largest costs of doing business is the cost of customer acquisition and, the cost of credit vetting and credit losses. It takes months, if not years, to forge new relationships with new customers and to build the trust which is required to do business and it costs a lot of money to get this right. Huge can introduce new businesses to this real estate of customers, who will then be in the fortunate position of not having to bear customer acquisition costs, credit vetting costs and credit losses as primary costs of building a business.

Huge’s operating companies are either high growth, high margin or provide scaling opportunities, or they have a combination of two or more of these attributes.

Huge Telecom, Huge’s largest revenue generating company, provides connectivity for making telephone calls, Huge Connect, Huge’s second largest revenue generating company, provides connectivity for processing payment transactions and Huge Networks, Huge’s third largest revenue generating company, provides connectivity for transmitting data. In today’s world, Huge’s services are universal and are universally required. The Fourth Industrial Revolution is all about connectivity and following the onset of COVID-19, it has become even more apparent that connectivity is the most important tool on which businesses rely to operate. The digital evolution has been fast-tracked, challenging the norms of commercial and societal structures worldwide.

Huge’s revenue streams are annuity in nature and as customers are acquired these revenue streams compound, like interest compounds on capital – and compounding is the eighth wonder of the world.

Huge Telecom is bringing a corporate telephony solution to the market, which is built on the GSM standard. While it has been working on this solution and the various components of this solution for over a decade, the executive management team believes that the tipping point of its acceptance in the market as the preferred corporate telephony solution is near. The conclusion of a supply agreement with a tier-1 mobile telephone network operator like MTN has brought this tipping point nearer. GSM is the perfect substitute for the copper cables of a traditional fixedline telephone operator’s network. While fixed-line telephony is ex-growth, voice is not and corporate voice using GSM is anything but ex-growth. It is a significant growth opportunity. People still need to make telephone calls, but they need to do so in a simple and easy way without the maintenance headaches and associated downtime and without the security risks associated with VoIP. GSM is simply not hackable. While Huge Telecom is still in its infancy, when measured by revenue, the opportunity to grow its revenue is significant.

In addition to providing payment connectivity to three of South Africa’s largest banks, Huge Connect provides connectivity to approximately 30 000 merchants. This provides Huge with the opportunity to dip its toe into the Fintech arena in a riskaverse cautious manner by offering cash advances secured by the future receivables collected at the time of a credit card or debit card swipe and at the same time that an acquiring bank takes its fee for the provision of the mobile-point-of-sale device. Lately, there are also suggestions that the banks are considering their involvement in the renting of mobile-point-of-sale devices and may even consider exiting this line of business. Huge Connect is perfectly placed to benefit from this change in strategy. As the payment industry evolves, a company like Huge Connect is better equipped to identify the right opportunities. The executive management team is determined to participate in this high-growth area of the market.

Huge Networks is a data connectivity business, not unlike the many other data connectivity businesses operating in South Africa – and there are many. The market for data connectivity to corporate customers is maturing and consolidating and the opportunities to scale businesses through acquisition are increasing every month. Data connectivity businesses require scale and Huge Networks is perfectly placed to scale. Scaling will improve operating profit margins.

Huge Software is key to Huge’s aspirations with connectivity, IoT, payments and Fintech. Point-of-sale devices must integrate with point-of-sale software, which must integrate with accounting software. Huge Software has already played a vital part in integrating Huge Telecom and Huge Connect’s CRM and billing engines with Huge Software’s accounting system.

In the world of connectivity, there is an age-old saying that he who owns the switching device owns the connectivity. It is not by chance that Huge decided to acquire a controlling interest in Pansmart. Huge will use Pansmart to grow its telephony connections and Pansmart will use Huge to acquire customers who need PABXs. This is another example of Huge levering its real estate of customers.

Huge seeks to acquire businesses with low service intensities and high service efficiencies, change the business models of currently owned businesses in an effort to decrease their service intensities and increase their service efficiencies and sell currently owned businesses whose service intensities are too high, or whose service efficiencies are too low, or where the trends in service intensities are rising at a faster rate, or where the trends in service efficiencies are falling at a faster rate than expected.

The service intensities of Huge’s two largest operating companies, Huge Telecom and Huge Connect, are low. They also have very high service efficiencies. These are exactly the types of businesses in which Huge wants to invest and they are also exactly the types of businesses which Huge wants to grow. The services provided by these two companies are ‘plug, play and walk away’ services where most of the time is spent installing, setting-up and activating the services rather than dealing with the ongoing maintenance of the services. In other words, they have low service intensities.

Huge’s operating companies seek to lower service intensities by adopting technologies which are simple to manage and/or which are easy to understand and maintain and accordingly will bring with them a lower service cost. They also seek to lower service intensities by reducing the number of variables in the business model or by reducing the number of variables in the service ecosystem – fewer variables mean less management and maintenance, lower costs of servicing and higher profit margins.

Other ways in which Huge’s operating companies have lowered their service intensities is through process automation, owning their own CRM, billing and accounting software, and integrating them and developing and owning some of the technology used in delivering the services. Huge Connect and Huge Telecom have developed and own their own CRM and billing engines and Huge Software has developed an accounting software platform which it licenses to third parties and to Huge’s operating companies. This has created significant service efficiencies.

Huge Telecom has developed its own routing devices, and this has introduced competition to the local market for the supply of routing devices, which has had the effect of reducing the costs to deliver the services.

These efforts matter, and these matters have the attention of the executive management team. Reducing service intensities reduces service costs and increases service efficiencies and ensures a higher conversion of gross profit into net profit. Huge believes that innovation must take place primarily at the service layer rather than at the technology layer because all technology eventually becomes commoditised.

Distribution and customer reach are key – a good product or a good service will never be a great product or a great service unless the product or service can reach the chosen customer market in a simple, efficient and speedy manner. Huge has access to approximately 800 Business Partners which enable it to go from good to great.

Over the last decade, Huge Telecom has built a sizable distribution capability through its Business Partner network. On average, each Business Partner has five sales representatives, and this provides Huge with about 5 000 ‘feet-on-the-street’. This is testimony to Huge Telecom’s distribution capability and its customer reach. In the last 18 months, the executive management team has been hard at work introducing these Business Partners to the management teams at Huge Connect, Huge Networks and Pansmart. The number of Business Partners who previously only sold the services of Huge Telecom and which are now selling the services of Huge Connect, Huge Networks and Pansmart is steadily increasing. This initiative is bearing fruit.

The capability of each operating company is dependent on a sustainable supply of its required inputs at the lowest possible cost, without comprising quality.

Huge’s operating companies focus on providing connectivity services which have already experienced high degrees of commoditisation at the infrastructure layer. The greater the commoditisation at the infrastructure layer, the lower the cost and the higher the gross margin. Huge Telecom and Huge Connect have very high gross profit margins. They are able, with these low costs, to add value at the service layer, and so they enjoy high gross margins.

Multiple sources of supply are very important, and the executive management team pays careful attention to managing supplier relationships, and the risks associated with these relationships. Negotiating and securing commercial supplier relationships is a time-consuming process and this raises a natural barrier to entry into Huge’s markets. Huge Connect delivers payment connectivity using dual SIM card functionality. Huge Telecom purchases voice connectivity from more than one supplier. This ensures competition for Huge’s patronage and a lower cost framework.

Mergers and acquisitions remain a key strategic objective of the Growing Huge Strategy and a central focus for the executive management team. Huge already has a substantial real estate of customers and growing this real estate by acquisition is a very important objective for the executive management team.

The executive management team believes that there are many acquisition opportunities related to businesses which provide various forms of, and attend to, various needs for connectivity, including IoT. In addition, businesses which provide Fintech solutions to customers would also fit into the gamut of acquisition opportunities which would fall within the framework of the Growing Huge Strategy. COVID-19 has made the world more reliant on connectivity, virtual delivery mechanisms and contactless digital payment solutions. The value of Huge’s customer real estate has enhanced its investment case and not simply preserved it.

The post-COVID-19 environment is likely to result in an acceleration of acquisitive opportunities. Valuation expectations are likely to be more tempered, thus increasing the number of viable opportunities open to Huge. Huge’s appeal remains its critical mass of customers and its ability to leverage them.

During FY2020, the executive management team closed the Otel Transaction and the Pansmart Transaction. These transactions were concluded without significant outflows of cash and were also concluded by way of an unlisted share swap. As a result of the Otel Transaction, Huge Network’s year-on-year increase in revenue was 120%. The Pansmart Transaction is an example of the revenue leverage that Huge can extract by giving an acquisition target access to its real estate of customers.

The executive management team will continue to focus on acquisition targets which have strong annuity revenue streams, high gross margins, low levels of service intensity, high operating profit margins and a high cash conversion rate.

Huge’s B-BBEE profile is important because it assists Huge in operating in the telecommunications industry and the broader South African economy. Huge continues to strive to improve the B-BBEE profile of its underlying operating companies.

Transformation in business is very important if a company wants to be a good corporate citizen and wants to drive positive economic outcomes for the whole of society.

COVID-19 has highlighted the important role companies can play in being good corporate citizens by being active members of the broader society, who provide immediate and emergency support to their stakeholders and the whole nation. Huge continues to target strategic initiatives that improve its transformation credentials, while also focusing on the well-being of its employees, particularly during economic circumstances as challenging as those currently being experienced.

During FY2020, Huge Connect concluded an empowerment transaction. Huge Connect is now 16.29% black-owned, and 60% of this black ownership constitutes black female ownership. This empowerment transaction significantly improves Huge Connect’s B-BBEE credentials and ensures that it can maintain its competitive advantage in both the private and public sectors. The transaction also constitutes a positive step in achieving the Group’s strategic objective of improving its B-BBEE profile.

During FY2019, Huge concluded empowerment transactions in respect of Huge Soho and Huge Cellular and during FY2020 the Huge operating companies acquired R48 million in products and services from these entities. Initiatives and investments focused on the transformation of Huge’s other operating companies will continue as a key objective of the Growing Huge Strategy.

Access to debt capital is a key enabler of Huge’s current expansion aspirations and the delivery of the Growing Huge Strategy.

In challenging economic times, successful deal making depends on innovative deal structuring. Huge’s ability to raise debt capital in partnership with financial service institutions such as Futuregrowth Asset Management enables it to be more flexible and agile when investigating acquisitive growth opportunities. The Board believes that the productive and progressive relationship between Huge and its providers of debt capital is evidence of the support that significant stakeholders are prepared to give to Huge so that it can achieve its objectives over the medium to long-term. It is also testimony to the quality of Huge’s underlying operating companies.

During FY2020, the executive management team created a centralised treasury function. This treasury function will operate through Huge Management and it will be responsible for providing capital to Huge’s operating companies. The objectives of this centralised treasury function include reducing the cost of debt on a Group basis and improving the internal oversight of intercompany borrowing and lending. The function provides the operating companies with a single point of contact for their borrowing requirements and it simplifies and speeds up the process of raising the necessary debt capital. This function creates efficiencies in the Group cash management processes and allows the operating companies to focus on more important objectives relating to business strategies and growth. It also allows Huge to leverage the strong relationships it has with its lenders and the experience of the executive management team in cashflow management and funding processes.

The debt to equity ratio of the Group is 22%. This provides Huge with a strategic advantage in pursuing and structuring acquisitions.

Access to equity capital is key to Huge’s growth aspirations and delivery of the Growing Huge Strategy.

The global trend in asset management from active to passive fund management has had a marked impact on stock markets. This has resulted in investments becoming concentrated in large capitalisation companies. This trend has meant that small capitalisation companies and their shares are paid little attention.

Huge’s executive management team continues to engage investors about the Group’s value proposition and investment case so that Huge might be positioned as a preferred investment destination.

Huge’s executive management team believes that there are many organic and acquisitive growth opportunities for Huge and that the Company can still leverage both its listed shares as well as the unlisted shares of its operating companies. The Group’s cash position and its access to reasonably priced debt means that it is unlikely that the Group will need to consider raising equity capital in the short to medium-term.

During FY2020, Huge established a share repurchase programme. In terms of this repurchase programme Huge and/or its subsidiary companies can repurchase up to 4 million Huge Shares for an aggregate consideration not exceeding R20 million. Undertaking the share repurchase programme reflects the Board’s belief in the value of the Huge Share.

During FY2020, the vendors of Huge Connect and Huge Networks agreed to restrict the sale of the Huge Shares that they received as consideration in the transaction which took place in March 2017, for an additional two-year period. In return, Huge waived the profit warranties it held against the vendors. This decision was made easy because Huge Connect and Huge Networks have exceeded Huge’s initial profit expectations. The vendors form part of the key management teams at Huge Connect and Huge Networks and are also substantial shareholders in Huge. This undertaking shows their commitment to Huge and their view of the long-term value proposition of being invested in Huge.